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Good morning and welcome to the First Industrial Realty Trust, Inc. Second Quarter Results Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there'll be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Art Harman, Vice President of Investor Relations and Marketing. Please go ahead.

Thank you, Jason. Hello everybody and welcome to our call. Before we discuss our second quarter results and our updated 2023 guidance, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans, and estimates of our prospects. Today's statements may be time-sensitive and accurate only as of today's date, July 20th, 2023. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release, and our SEC filings are available at firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Now, let me hand the call over to Peter.

Thank you, Art and thank you all for joining us today. Our team delivered an excellent quarter, highlighted by an FR record-setting increase in cash rental rates on new and renewal leasing. We also achieved some leasing wins at some of our developments and began construction of two new buildings in coastal markets. As a result of our performance and updated outlook, we raised our estimate for our 2023 cash rental rate growth and full year FFO per share guidance, which Scott will discuss shortly. Before we get deeper into our results, let me spend a moment discussing the broader US industrial market. Overall fundamentals remain good. National vacancy today is low at around 3.7%. In our 15 target markets, vacancy is 3.3%. As we discussed on our last call, there's a fair amount of new supply expected to be delivered nationally in roughly the next 12 to 18 months. Based on CBRE EA's analysis, there is 540 million square feet under construction across the US, 31% of which is pre-leased. Focusing on our 15 target markets, completions are expected to be approximately 400 million square feet with 30% currently pre-leased. Nationally, new starts in the first half of 2023 are down approximately 40% compared to the same period a year ago as sponsors continue to evaluate the economic landscape, and the revised economics of new projects due to meaningful increases in the cost of capital. With respect to demand, the pace of leasing activity in our in-service portfolio continues to be strong. Tenants are making leasing decisions many months in advance of their lease expirations, and we are achieving very healthy rental rate increases. I will touch on these two points later in my remarks. For the unleased portion of our 1.8 million square feet of completed developments that is slated to be placed in service in the third and fourth quarters, we have interest from prospective tenants for many of the spaces. However, Tennant's decision-making time frames have elongated compared to a year ago. Customers are dealing with uncertainty in the overall economy and the Fed's decision to delay future rate hikes likely didn't provide any comfort. As a result, we adjusted the lease-up assumptions for some of these developments, which impacted our average occupancy guidance midpoint by 75 basis points for the year. Scott will walk you through the details, but importantly, we have offset the FFO impact with the help of leasing at other developments. Returning now to our performance. We finished the second quarter with an occupancy rate of 97.7%. Our cash rental rate increase for leases commencing in the second quarter was 74.1%, exceeding the FR record we established just last quarter. As of yesterday, approximately 81% of our 2023 lease expirations are in the books at a cash run rate increase of 63%. We now anticipate that our cash increase on rental rates on new and renewal leasing for 2023 commenced leases will be in the range of 55% to 60%. This is an increase of 7.5 percentage points at the midpoint compared to what we mentioned on our April call and 12.5 percentage points higher than our original guidance. As we've highlighted previously, one of the drivers of our record-setting rental rate increases is the contribution from our Southern California lease signings. For 2023, of the 2.1 million square feet expiring in Southern California, we already have signed leases for 72% of that space and a cash rental rate increase of 156%. Looking ahead, we're already seeing renewal activity on our 2024 lease expirations. Of note, we have taken care of next year's largest lease expiration by square footage with the renewal of a 700,000 square foot tenant in Nashville and a 40% cash rental rate increase. We've also inked a 213,000 square foot renewal in Central New Jersey for a 128% cash rental rate increase. So we're off to a good start addressing our 2024 lease expirations, and we will provide you with an update on our leasing progress on our third quarter call. Now I'd like to provide you with a leasing update on our 644,000 square foot old Post Road building in Baltimore. Our prospective 3PL tenant continues to await the final decision from the government regarding the contract awards. We continue to assume lease-up of the full building in the third quarter, and this is the start date of the contract award. We also continue to market the building to new potential tenants. Moving on to development activity. Since our last earnings call, we signed full building leases for the 56,000 square foot First Park Miami building 13 and a 132,000 square foot first gate Commerce Center, both in South Florida. At our three building project in our Phoenix JV, we pre-leased the 420,000 square foot building to a restaurant supply business. Given our success in South Florida at our First Park Miami project in the infill market of Medley, we broke ground on the 136,000 square foot building 12. Total estimated investment is $34 million, and the projected cash yield is 6.9%. This will be our seventh building at this multi-phased park, the previous six released at or shortly after completion. Beyond this new start, we look forward to further growth at First Park Miami. We just closed on another phase of land at the park, which is billable to approximately 430,000 square feet. We expect delivery of the last parcel from the seller per our option agreement in mid-2024, which would accommodate another 430,000 square feet. When fully built out, the park will total 2.5 million square feet. On the West Coast, we broke ground at First Harley Knox Logistics Center in the Inland Empire. First Harley Knox will be a 159,000 square foot facility with a total estimated investment of $31 million and a healthy projected cash yield of 8.4%. Including the second quarter development starts, our developments in process totaled 2.7 million square feet with an investment of $441 million. The projected cash yield of these investments is 7.9%, which represents an expected overall development margin of approximately 75%. In addition to the First Park Miami land, we also closed on three more new development sites since our last call. In the Lehigh Valley in Pennsylvania, we acquired 66 acres for $24 million. This site can support a four-building park totaling 762,000 square feet. In the Inland Empire East, we added a four-acre site in Paris for $13 million, that is next to a site we already own. Combining these sites will allow us to build a single 550,000 square foot building at a higher yield and margin. We also acquired five parcels totaling 101 acres from four sellers in North Palm Springs on the I-10 corridor for a total of $21 million. This assemblage will position us to build up to three buildings totaling 1.9 million square feet with a very competitive land basis. In total, our balance sheet land today can support an additional 16.8 million square feet. This represents approximately $2.6 billion of potential new investment based on today's estimated construction costs and the land at our book basis. These figures exclude our remaining share of the land in our Phoenix joint venture. Since our last call, we completed the sale of two buildings in Houston and Detroit, totaling 190,000 square feet plus a small land parcel in Minneapolis for a total of $18 million. Our sales guidance for the year remains $50 million to $150 million. With that, I'll turn it over to Scott for some additional commentary and updated guidance.

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.61 per fully diluted share compared to $0.56 per share in 2Q 2022. Our cash same-store NOI growth for the quarter, excluding termination fees was 10.8%. The results in the quarter were driven by increases in rental rates on new and renewal leasing and rental rate bumps embedded in our leases, partially offset by slightly lower average occupancy, higher free rent and an increase in real estate taxes. As Peter noted, we finished the quarter with in-service occupancy of 97.7%, down 70 basis points compared to 2Q 2022, primarily due to anticipated move-outs. Summarizing our leasing activity during the quarter, approximately 1.7 million square feet of leases commenced. Of these, 200,000 were new, 900,000 were renewals and $500,000 were for developments and acquisitions with lease-up. As a reminder, we are strongly positioned with no debt maturities until 2026 and assuming the exercise of extension options in two of our bank loans, which puts us in an advantageous position given the volatility and higher interest rates in the financing markets. Moving on to our updated 2023 guidance per our earnings release last evening. Our guidance range for NAREIT FFO is now at $2.37 to $2.45 per share. Excluding the $0.02 per share income item discussed on our first quarter call, our guidance range is now $2.35 to $2.43 per share. Our new midpoint of $2.39 per share is a $0.01 increase at the midpoint primarily due to higher capitalized interest from our two newly announced development starts. Key assumptions for guidance are as follows: quarter end average in-service occupancy of 97% to 98%. As Peter mentioned, this is a 75 basis point decrease at the midpoint given the length and decision-making timeframes we're experiencing from some of our prospective tenants. In particular, we have adjusted the lease-up assumptions for the available space at the 1.2 million square feet of developments that will be placed in service in the third quarter. We are now projecting that approximately 860,000 square feet of that space will be leased up in the fourth quarter of this year with the remainder to be leased in 2024. We also adjusted some of the lease-up assumptions for the development scheduled to be placed in service in the fourth quarter. Of the 650,000 square feet, half is still anticipated to be leased in the fourth quarter and the other half is now slated to be leased up in 2024. Moving on to our other guidance components. Same-store NOI growth on a cash basis before termination fees of 7.75% to 8.75%. Note that the same-store calculation excludes $1.4 million of income related to insurance claim settlements recognized in the fourth quarter of 2022. Guidance includes $0.02 per share of JV FFO related to our share of the ground rent from our joint venture discussed on our first quarter call. Guidance includes the anticipated 2023 costs related to our completed and under construction developments at June 30. For the full year 2023, we expect to capitalize about $0.10 per share of interest. And our G&A expense guidance range is unchanged at $34 million to $35 million. Guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances, debt repurchases or repayments nor the potential issuance of equity after this call. Let me turn it back over to Peter.

Thanks, Scott, and thank you to all of my teammates for another excellent quarter. We're delivering strong cash flow from our portfolio as we capture our cash rental rate growth opportunities and maintain high-level of our occupancy. Our regional teams are laser-focused on the lease-up of our pipeline as we build upon our track record of development execution and value creation. Operator, with that, we're ready to open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Rob Stevenson from Janney. Please go ahead.

Good morning, guys. Peter, you sold the Houston asset in the quarter. What's the market like for asset dispositions today given where rates are and the availability of debt for private buyers? And I guess the other thing is, is it how much are you guys able to rely on dispositions as a funding source today given those factors?

So the disposition market is open, the transaction market is open, albeit at lower volumes than you've seen in the past. And as we've always said, most of our sales end up going to users or high net worth family offices are regional -- smaller regional funds and we're having quite active dialogue on some deals with that kind of a buyer group. In terms of financing, their financing is available, it's expensive so you're seeing a lot of these deals happen with all equity right now.

Okay. And then the $145 million of derailment you're expecting to complete in the second half of this year, how are you thinking about starts behind those over the next six to nine months? Are you waiting and letting some of that 400 million square feet of development that you talked about in your markets, clear? Do you just keep your head down and start your projects when they're ready here you guys thinking about starts over the next six to nine months?

Sure. Obviously, development leasing is going to dictate to a large degree, the opportunity to have starts, but also so are the markets. We're going to continue to evaluate the fundamentals in the market, leasing velocity, et cetera. And we do have a number of very good projects lined up that we can bring but we're a profit shop and not a volume shop. And if the market and the risk-adjusted returns right there, we’ll just hold up.

Okay. And last one for me, Scott. So 9.4% same-store NOI year-to-date guidance at the midpoint is like 8.25%, which implies about 7% in the back half of the year. Is it just tougher comps, or is there something else that slows you down 200, 250 basis points versus what you've seen year-to-date in the back half of this year?

Yes, this is Chris. The decline in spend rate due to the year-over-year drop in average occupancy are – average occupancy in then first half of 2023 versus the first half of 2022 is up slightly. The back half of 2023 versus comparable 2022, the average occupancy is down slightly. The balance of that decline is really just due to little bit lower cash rent increases in the second half, and then our real estate taxes and bad debt are negatively impacting that a little bit.

Okay. Very helpful. Thanks, guys.

Our next question comes from Michael Carroll from RBC Capital Markets. Please go ahead.

Yes, thank you. Can you guys provide some color on your Baltimore portfolio? I mean, what drove the overall occupancy within that portfolio lower? I mean just kind of looking at the comps, it looks like it's a property that's near your old post road. I mean, is that correct?

Good morning, Mike, it's Peter Schultz. Yes, it's one building of 350,000 square feet that was a known move-out. The tenant moved to a consolidation into almost 2 million square feet in a build-to-suit. The building is being market. We're seeing activity from full and partial users. The amount of supply in that submarket continues to be very limited. And in fact, there's a limitation on new industrial development imposed at the moment by the municipalities. So, we'll keep up to date on our progress on re-leasing that. But that's the one building that impacted the occupancy.

Okay, great. And then what is the -- I guess -- I know you kind of talked about that there's interest in that asset. I'm assuming the 3PL tenant that might take the building next door they wouldn't be interested in it. I mean, is this an expectation of another elongated leasing process or is that interest level strong enough that there could be a quicker lease-up?

So in general, I would tell you that smaller mid-sized tenants are more active in making decisions quicker than larger tenants. So we would anticipate the lease-up of this asset. Certainly to be faster than 500 old post road and we'll keep you posted. But as I said, we are seeing activity from full and partial tenants now and they don't have a lot of choices.

Okay. And then on the completed developments, the ones that are going to go into service in the back half of this year. I mean how strong are those markets? I mean, it looks like Denver is one of the markets that were a couple of assets are in. I mean, is there a lot of interest in those assets? I mean, how many tenants are specifically looking at those properties in general?

Yes. So in Denver, we have two buildings of 588,000 square foot building and a 200,000 square foot building. Generally speaking, we're seeing activity from partial building users for the most part, a couple of full building users on the smaller building. And as I just said in answer to your other question, activity levels and interest levels are better in the smaller or midsized and those decisions are being made faster as opposed to tenants, larger sized tenants where they continue to be slow playing those discussions both of these buildings were designed and built with the expectation that we would multi-tenant both of them. So, it's really a matter of when the deals get done, but we have multiple prospects on both buildings, we just would like to see the decision-making proceed a little bit faster.

Yes, understood. I mean just last question for me is like what is the reasons for the delayed decision-making? Is it just the current disruption in the capital markets? And are you surprised that it's taking them this long to make those decisions?

So the decision to lease a 600,000 or 700,000 square foot facility, it's a big, big financial commitment. Not only do you have the rent, but you've got to equip the building and put inventory in the building and hire people, and it's tens of millions of dollars. And so some of the larger users are deciding -- trying to decide when is the right time to fund their growth. This is all new growth. The need is there, but the need may not be today, maybe three months from now or a bit later than that. So, that's really the decision they're tossing around as they look at what's happening with rates and the impact on the economy and whether we're going to have a recession, et cetera. It's really just trying to make the right decision about when they invest pretty big dollars into their business.

Okay. Are you surprised that it's taking them this long to make these decisions?

Not really. I mean I think every business is trying to figure out what the go-forward looks like just like we are, and it's not surprising given all of the uncertainty in the market.

Okay, great. Thank you.

Our next question comes from Craig Mailman from Citi. Please go ahead.

Hey, guys. Peter, on the development pipeline, not to harp on this, but as I'm just going through it, you guys haven't done a lot of build-to-suit and it just feels like with a pullback in your competitors really being able to secure financing. Is this an area that you guys could start to gain some market share in to maybe derisk the pipeline a little bit on incremental starts?

Good question, Craig. We are in the build-to-suit business. As you know, we don't do a lot. We'll offer that we are having some conversations on that front now. So we'll see where they go.

I mean, are the -- is it a return issue where you guys don't want to give up the profit margin, or is it just you don't have the land site where the RFPs are at this point?

I would say that it's both. The returns on speculative development are obviously, and in many cases, significantly higher. And we target land that it is in pockets of unmet demand. And we don't have as many alternatives in some markets as maybe some of the other competitors would have. So that limits the number of build-to-suits that we're positioned to do.

Okay. And then just going through where you guys have the availability, there's clearly a fair bit of square footage in California, and that's obviously ground zero for a lot of concerns right now among the investor community. I mean, could you talk about what you're seeing in different size ranges and different submarkets vis-à-vis where you guys have availability?

Specific to SoCal?

Yes.

Yes. Jojo, do you want to provide your thoughts on that?

Sure. In terms of availability, our existing portfolio is basically close to 100% leased, very, very few spaces available. We have one space in the Empire East that our dry lease very, very good product, well, well below market. In terms of our spray of developments, we have we have four ongoing right now. Nothing is completed right now, and they're scheduled to be completed closer to Q4, and we're getting inquiries and towards. If you look at the four developments that are under construction, they range from 83,000 square feet to 460,000 square feet. They're spread over inland Empire West Montana into inland Empire East, the submarket of Redlands in the 250 corridor. We're getting tours and looks at every building well we haven't announced a set, because we don't have to lease yet, but we're working hard to get this all those pre-leased. Today, users are more inclined to seriously engage in leasing when the building is close to getting built. As you may have heard, there have been some delays due to supply chain and municipal approvals in California. And then a lot of tennis has been a little bit concerned that buildings, people delivered exactly on time. So that's affected a little bit of leasing. But by and large, again, the prospect activity has been active.

And just to be clear, there's a fifth building that we just started, Craig, so the Harley Knox deal we talked about earlier, so.

Yes, that's not going to be completed until 2024.

Okay. And then Carvana put out some news yesterday about restructuring. It looked like some of the ADESA assets were put up as collateral. I mean, from your standpoint, is that just improved the credit for you? Is there any insight you guys have on that transaction and how you guys feel incrementally about that credit?

I mean we don't have any particular insights that you already haven't read about in the newspaper. It certainly looks like they're doing their best to right the ship. It's interesting to us that the founders have put in some substantial cash into this new deal. And at the end of the day, these ADESA sites are owned by us, leased to them. And as we said on prior calls, if we get that back, yes, we'll have a short-term hit to FFO. But the long-term value creation is significant. So we'll take the cash flow while they're paying rent, and they are current. And if they stop paying rent, we'll take the assets back and redevelop them and make a heck of a lot of money.

Okay, great. That’s it for me

The next question comes from Ki Bin Kim from Truist. Please go ahead.

Thanks. Good morning. Just to go back to the Inland Empire topic. Given that you have a few projects that you're developing there, how do you just view the supply-demand dynamics in that market and how it might impact the lease-up timing for your projects?

Jojo?

Okay. Again, the buildings are still in reconstruction. As we've always said, current our underwriting always has a one-year downtime. In the past, there's been pre-leasing in that market. I think today, we're more of a normalized wherein we lease it within our underwriting period. In terms of activity, again, we've seen a better activity in Q2 even over Q1. If you look at even the containers cargo flow inbound containers only in June almost this year, almost match June of 2022, wherein the Q1, the 2023 lagged Q2 TEU traffic. So we see a little bit of improvement. I think overall, this agreement between the unions and the owners, it has been ratified yet, but they reached agreement on a labor agreement. So I think that will give more visibility to shippers and all that, and I think they'll reduce any concern. And it all depends on how the economy moves. But bear in mind, overall, that LA is still sub-2% vacancy at 1.7%. And basically, i.e., is sub-3% at 2.7%. So -- and it's the hardest place entitled land today in the US. So long term, supply should be -- continue to be constrained.

And your retention rate was 60% this quarter. Obviously, the Baltimore lease probably made a big impact. But just overall, when you look at the reasons why tenants don't renew have the different reasons or categories shifted at all? And I'm just curious if tenants are becoming increasingly more price-sensitive.

So in our portfolio, when tenants have left and this continues to be true, they've left because we can't accommodate their need to grow. The tenant, in fact, in Baltimore that moved out consolidated into a nearly 2 million square foot facility. So we obviously couldn't provide that growth room for them. So that is really the reason people leave. When we're discussing potential tenants for lease-up of new developments, once in a while, a tenant will come around and say, 'Gee, I'm going to move, let's say, if it's California, East to pay a little bit lower rent.' But that's not a trend, and that's not really -- that doesn't represent the bulk of any of those conversations.

Okay.

And Kevin, this is Chris, too. In a majority time, we're releasing those at significantly higher rents when they move out, so yes.

Okay. Thank you.

Our next question comes from Nick Thillman from Baird. Please go ahead.

Hey, guys. Maybe just going on development. Unlike the market rent growth sort of new development. Have you seen market rents for new development in your markets? Have they peaked, or are you kind of seeing any retreating there?

We -- market rents are growing. I think earlier in the year, we thought it would be in the kind of 5% to 10% range. We still have a view that when you get to the end of this year and look back, you'll see that rents grew mid- to high single digits for the year nationally, obviously, at the higher end of that range in the higher-barrier markets. In some places, there may be interest in racing to lease like South Dallas. So, maybe rents there aren't growing, in fact, maybe sagging a tiny bit in the 1 million-foot category where there are quite a few large-format buildings available. But generally speaking, across the markets, we do continue to see decent rent growth.

Okay. And then maybe another way of asking the Southern California development question, but just what are you guys tracking for like on a square footage basis of demand in SoCal? And maybe how has that changed over the last like three to six months?

You have a view on that?

Well, there's no exact square footage because there's no data exactly, and it continues to shift quarter-by-quarter and by week by week. But I think the way I would characterize is that Q4 2022 -- Q3 to Q4 2022. I would say for every vacant space you have, you might have three to four prospects today you would have one to two looking at your building at any given point of time.

That's helpful. And then maybe last one for me for Scott. Any shift in the tenant watch list or bad debt expectations for the remainder of the year?

No, Nick, nothing. Our bad debt expense continues to trend low. It was under $100,000 in 2Q. So year-to-date, our total is $180,000, so very low. Again, no material tenants on the watch list and Peter spoke about ADESA.

Yeah. Let me add one more thing to what Jojo just said, the tenant velocity or tenant interest reflects more of the demand that we had in 2019. So obviously, we've been around -- all been around a while 2018, 2019 were at the time the best markets we've ever seen. So this is, again, why at the beginning of the year, we discussed normalization of demand. It's really going from multiple four or five prospects per space down to two or three prospects for space.

Very helpful, and thanks for the time.

The next question comes from Nicholas Yulico from Scotiabank. Please go ahead.

Thanks. I just want to follow-up back on the old Post Road potential tenant there or re-leasing. It sounds like -- I think you said, you're still including this in the guidance for third quarter leasing. So you're assuming even if the one tenant with the government contract doesn't work out that you have a backup tenant there for that asset.

Nick, it's Peter Schultz. So the assumption is that the 3PL that we've been working with for some time, as you know, for the government contract that, that gets released by the government some time in the near future and the lease-up remains in our third quarter guidance. I'm not prepared to tell you that we have somebody else today behind that. What I would say is, we continue to market the building and we continue to see prospects. We had a fresh tour this week in both buildings, but we'll see how it goes. The government wants to get this done and it's taken an awfully long time as everybody on this call knows from our prior calls. So hopefully, we'll have some news to report on that sometime soon.

Our assumption of a third quarter lease-up reflects our expectation and the probability that our tenant wins this contract.

Okay. Thank you. Appreciate that. And then just going back to Southern California. I know there's already been some questions on this. But if you look at the occupancy at quarter end, in the SOP. I mean it was down 100 basis points or so versus the average number. Can you just talk about what drove that in particular and how we should think about maybe trending occupancy for the market for the rest of the year?

Yeah. Nick, this is Chris. George had mentioned that we had one space that was available in Empire. That was a 225 square foot move-out. The rent is very significantly below market rent. So we have an opportunity to release it at a much higher end. So that's really what is driving that occupancy drop.

Okay. Got it. And then just last one on the land inventory the number that's on the NAV page, I think it -- I mean, it says it's a fair value number. Can you just give some perspective on how you may have adjusted the land values. We have heard some level of correction in land values in the market, realizing that in many cases, you guys still have a good basis in land, but how we should think about fair value of the land today?

Sure. This is Giorgio. We look at the schedule quarter-by-quarter, and we adjusted what we believe our fair market values how basically -- I mean, from Q1 and Q2, I would say the big change would be changed. But some of the changes the North Palm Springs we acquired at, and we think we're clearly in the money on that already because that's an off-market deal with an assemblage. And over time, we've adjusted is, especially on the entitlement basis. I say time basis, SoCal when it's acquired, it's unentitled. And as we go through successful entitlement and we've been successful 100% of the time with all of these are SoCal land acquisitions, we've adjusted that over time. But that's -- we do this as a fair market value basis every quarter.

And is there just any rough percentage you're able to share about how much you've adjusted your land values down versus a peak value?

Well, what we've actually done is not -- we've actually not adjusted it up when it was due to be adjusted up and until we complete entitlement. So it's more of meeting the market.

Okay. Thanks.

[Operator Instructions] Our next question comes from Anthony Powell from Barclays. Please go ahead.

Hi, good morning. One follow-up on old Post Road. I guess, how much FFO or occupancy is in the guidance, assuming that the contract is done in the third quarter?

Sure. This is Scott. It's about $0.01 per share in FFO related to that lease-up and the occupancy impact, this is the impact on our quarterly weighted average occupancy is about 50 basis points.

Okay. Thanks. And maybe one on market rent growth. I think in prior quarters, there's a lot of optimism about just Southern California and coastal market is doing very well. And recent calls I've heard just increasing strength in more interior markets. So, maybe you could talk about coastal versus non-coastal rent growth trends seen recently?

Peter, do you want to talk about what you're seeing? And then Jojo you talk about the SoCal?

Sure. In general, the best markets are Southern Florida and New Jersey, where rents continue to really grow. As we mentioned in the script, we just leased or announced the lease-up of two more buildings in South Florida that will occupy in the third quarter and the rent growth there has substantially outpaced our pro forma. Jojo?

Yes. So, if you look at the outlook that we basically in the Southwest and Jersey market and then basically go West. If you look at Dallas and Phoenix, for example, due to increase in consumption zone due to the increase in migration of population and businesses, they really experience a good amount of rent growth and we foresee to continue to experience that. In fact, Dallas and Phoenix has been a big contributor, along with South Florida, a big contributor for our quarterly cash rent growth. When you move on to the West, in the West, as you all know, I mean, in SoCal, primarily LAIE, rents have increased about 100% over the last two years. And over the three years, they've increased anywhere from 125% to 150% over three years. So, significant, significant rent growth. Every portfolio owner and every development has enjoyed that and that's the reason why we've been able to continue to develop on higher yields. So, going forward, we think rent growth will be in the 5% to -- 5% to high single-digits in SoCal due to just a little bit of companies taking a breather. And again, once a lot of owners have achieved significant returns and yields on their investments. And then it also is due to the fact that's a little bit reduced core traffic, although I mentioned to you earlier that the June number is closer to the June 2022 number. So, maybe that's a little bit of a turnaround. So, that's what we're looking at.

Thank you.

The next question comes from Caitlin Burrows from Goldman Sachs. Please go ahead.

Hi, good morning. Maybe going back to development lease-up, it sounds like you're still generally assuming 12-month lease-up timeframes for the development projects. So, I was just wondering what it could take for that assumption to change, recognizing that right now, you still seem to feel good about 12 months in general?

I suppose, experience of not being long enough to change our view. I think right now, we think that we're in a period of adjustment as we digest. And if you look at net absorption over the last several years, it was enormous in 2021 and 2022. It actually started in the fourth quarter of 2020. And that fueled a lot more construction, a lot more capital coming into the business. And so you have this way above-trend construction pipeline. And now, as we've said earlier, starts are up 40%. So, I think the market is going to take a bit of some time to digest that larger development pipeline. But at the same time, as we get into the second half of next year, we think there's going to be a shortage of space. So, that's really what we're dealing with right now, and we look at our assumption for downtime, and we think that given that picture of that scenario, 12 months is still the right number.

Got it. Thanks for that commentary. And then maybe also just subleasing as a topic that's been coming up some, I think not because it's significant, but just because it's off a low base. So just wondering if you could comment on, if you're seeing subleasing activity happen? If so, where and at what point it could potentially be a concern or not?

Yeah, Caitlin, it's Peter Schultz. So you're right, sublet space is up a little bit, but I would probably put it in two different buckets. There are, handful or some sublet spaces portions of buildings that occupiers are trying to sublet or tenants that are trying to limit a sublet term to only a year or two. So we don't really consider that legitimate sublet space. The other bucket is spaces that are on the market for sublet. And in general, we've seen those get absorbed pretty quickly in the higher-barrier markets. Jojo, anything you want to add?

No, that's good, Peter. The only thing I'd like to add, there is some sublease spaces that are actually the seat took back because now their plans have changed and they figured out that they actually need it long-term. And a number of these large subleases, they've actually wanted to do only a couple of years of term, and that's actually not very favourable for the new tenant is coming in because a lot of tenants don't want to move in and be forced to move out in the short-term.

Yeah. No, that makes sense. Thank you.

The next question comes from Todd Thomas from KeyBanc Capital Markets. Please go ahead.

Hi. Thanks. Good morning. First question, in terms of occupancy, just stepping back a little bit more broadly, you mentioned the decrease in Baltimore in the quarter and discussed Southern California. Can you provide some thoughts around whether you anticipate occupancy stabilizing by year-end or in early 2024 or whether you see potential for occupancy to continue normalizing as you move forward throughout 2024 is the 400 million square feet delivered in the pipeline that you discussed?

Yeah. This is Chris. I mean, the drop in occupancy is all related to the new developments coming online. If you look at our same-store portfolio, we're -- that's very stable. We're expecting the average for the entire year to be about 98%. So still very healthy strong numbers in the existing portfolio.

Okay. And then just, I guess, a follow-up on Baltimore and Old Post Road maybe a point of clarification around something that you said earlier. The recent Baltimore vacancy that occurred this quarter, that's adjacent to the 644,000 square foot facility. Does that vacancy at all impact your efforts or the outcome potentially at the Old Post Road facility? And would, the government tenant at all have interest or in taking the additional square footage that's available now?

No. The new vacancy doesn't impact or influence the outcome at the larger building. We want to get the deal done with the government contractor at 500. Certainly, they could have interest as most tenants have interest in expansion capabilities. But as I said earlier in response to another question, the level of activity for full or partial buildings in 350 is pretty good. So we're optimistic that we'll make some headway there. And as Peter said earlier, our plan is based on the government contract being finalized and awarded for the larger building year yet in the third quarter.

Okay. And just last one for me. The dispositions, you maintained that $50 million to $100 million guidance and you've sold one asset so far for $15 million this year. Can you just talk about demand for asset sales and whether there's anything progressing at this point that's in the pipeline that you're seeing?

Sure, just to correct, it's $50 million to $150 million, not $50 million to $100 million of the guidance. But -- there is a market and the pricing isn't bad. And we've always intended our closings to be back-end loaded. So that's why you haven't seen much volume. And we maintain the guidance range, and that's kind of reflective of our expectations of how the market is going to end up.

Okay, all right. Got it. Thank you.

The next question comes from Michael Mueller from JPMorgan. Please go ahead.

Yeah. Hi, I guess if you look at your in-process development, all but two of the projects are in California or if you look at what's been delivered in 2023 to date to 2022, I think there was just one California development, now California is a big state. But do you see the geographic mix of the starts over the next couple of years as -- being as concentrated in California as what the current pipeline is?

The projects that we are evaluating for future starts are almost solely on the coasts, which would include California, obviously, South Florida, New Jersey, PA, et cetera. So that's where the focus is going to be. Does that answer your question?

Yeah. And I think that is it. Thanks.

The next question comes from Jessica

Good morning. Just wondering for some of your large box developments where additional tenant demand is slowing down currently. Do you have any optionality to divide those up into smaller suite sizes? And do think that could help with lease-up time at all?

Yeah. Our projects are designed with that in mind, so that we can demise and still provide all the functionality that the tenants require. So we're in a pretty good position with respect to that.

And have you tried that option for some of the large boxes where you changed your lease-up assumption?

As Peter mentioned, for example, in Denver with our 588,000 square foot building, that was designed to either be single or multi-tenant. Obviously, we do some -- a few things differently to make sure we can multi-tenanted but we do that. So there's no change in direction. It was just maintaining our optionality and creating a building that is functional under both scenarios.

Jessica, it's Peter Schultz. The other thing I'd add to that is when we deliver buildings, they're moving ready. So they already have back office, we've permitted demising walls and so forth. So to Peter's point, we're already way ahead of that curve. Nothing else that we would do differently because that is part of the strategy.

And then just to add on. And our design of multi-tenant not only is on the large buildings, but in the midsized to smaller buildings, Case in point, first deal in Seattle that's 129,000 footer, but we designed that building to basically be accessed on both as a building with docks available to the length of the building. And therefore, there, we were able to successfully lease at completion half of the building at 64,000 floors.

Okay. Great. Thank you. And then just a second question. Curious for your Havana site. So if they do go out of business, per year lease agreement with them? Are you going to be getting back all the land at once, or is there going to be a separate process?

If they default on those leases, there would likely be a legal process that we would go through. I can't predict how long that would take. But the outcome eventually would be that we have the ability to develop or sell and some of the sites we would probably sell because there's a higher and better use now after all these years. We would have the right to develop or sell those sites after the legal process that we don't have to go through to take them out, essentially, they kick them out.

Okay. Great. Thanks for comments.

The next question comes from Vikram Malhotra from Mizuho. Please go ahead.

Thanks for taking the question. Just following on that development question around, can you slice up the properties if demand is more sluggish. I'm just wondering more tactically, let's just say, lease-up is a little longer than the 12 months you baked in. What do you do in terms of -- or what's the thought process around gaining more share? Is it rents? Is it more incentives? Do you sort of -- what would you do to try to gain share in that environment just given the macro if things slow down from here on?

Well, historically, when markets soften, concessions go up, whether it's free rent or additional above standard TIs or lower rents, we're not anywhere near that. I mean that's free rent today continues to be one-third or half a month per year of the lease term. It's standard TI packages today. We're still getting higher rents than had pre-existed previously. So you got a long way to go before you get to what you're talking about.

Okay. Makes sense. And then just on SoCal, you talked about market rent growth now being mid single-digits to high single-digits. One of your peers sort of articulated there's a there's actually push back on the rent level itself, just like you highlighted, rents up 150% over three years. Are you actually seeing incentives also go up specifically in SoCal as a landlord try to attract new tenants?

Jojo, do you want to cover that?

Sure. No, we are not seeing any increase incentives. Like Peter mentioned, free rent per term of year has been pretty sticky, TI has been pretty sticky, meaning it's been pretty standard TI per square foot, TI allowance and improvement allowance, I mean. In terms of just pushback, I mean, if you look, like I've mentioned earlier, if you look at -- there are some tenants who are looking for a little bit of relief on rent, because of that 100% appreciation. So now in U.S., that has marked a little bit of less absorption of our rents gave a little bit, maybe 1% to 2%. But in IE East, we're in, again, they're cheaper rent. Actually, the rent went up. So I mean -- and that was from a Q2 situation. I think -- that's the kind of situation is more short-term and may just be a quarter or two.

Got it. And then just last one, again, one of your peers sort of outlined over the next several years, three to five years, even if there's no rent growth, limited -- more limited demand, there's still a scenario where same-store NOI growth can -- I believe the word was average 7-ish percent, I may be wrong on that. If you look out sort of three years, not looking for next year's guide, but just on a longer-term basis, three, five years, assuming market conditions exist as they are today, where do you see sort of the structural same-store NOI growth of your platform?

Well, a couple of things. One, obviously, all of us have significant upside as our leases continue to roll, as you've heard us today talk about what's going on in some of these markets, and it's in a pretty broad basis. The second thing is annual rent escalations have gone up pretty significantly. And so our portfolio rent escalation average is going to go north of 3% next year. So those are both going to contribute to a pretty significant growth as you say, even if rents stay flat for the next three to five years. I'm not -- I don't think we have a number to put on that right now. I know one of our peers did, but we are very optimistic about the future growth opportunity, again, even if rents don't grow.

Fair enough. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Baccile for any closing remarks.

Thank you, operator, and thanks to everyone for participating on our call today. If you have any follow-up questions, please reach out to Art, Scott or me. I wish everyone a happy, healthy and productive summer.